EZCORP, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. EZCORP operates pawn businesses in the U.S. and Mexico and holds an approximately 31% investment in Cash Converters International. Grupo Finmart, a Mexican payroll-loan business, was classified as held for sale and reported as discontinued operations.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $170.2m, up 3% from $164.6m | $545.9m, down 1% from $549.7m |
| Operating income | $6.5m, versus loss of $2.2m | $26.9m, up from $22.0m |
| Continuing-operations income, net of tax | $2.8m, versus loss of $0.8m | $8.5m, up from $4.9m |
| Net income (loss) attributable to EZCORP | $(5.7)m, versus $(9.8)m | $(87.3)m, versus income of $3.1m |
| Operating cash flow from continuing operations | Not separately presented for the quarter | $47.0m, down from $71.8m |
- Core pawn trends: Quarterly pawn service charges rose 8% to $62.5m; merchandise sales gross profit increased 7% to $33.9m and merchandise margin improved to 36% from 34%. For nine months, pawn service charges rose 6% to $193.2m and merchandise gross profit rose 12% to $117.2m, with margin up to 38% from 34%.
- Balance sheet at June 30: Cash and cash equivalents were $29.4m, pawn loans $160.3m, inventory $130.4m, and total assets $988.0m. Long-term debt, net, was $211.4m; total liabilities were $420.7m. These figures present Grupo Finmart assets and liabilities separately as held for sale.
- Debt and liquidity: Total debt and capital-lease obligations, including held-for-sale liabilities, were $328.5m, down $43.0m (12%) from September 30, 2015. Cash including amounts held for sale was $31.1m; $5.4m held by foreign subsidiaries was not available for domestic operations. Cash from continuing operations included a $34.2m tax-loss carryback receipt.
Material changes and unusual items
- The nine-month attributable loss largely reflects discontinued operations, including a $73.9m goodwill impairment charge for Grupo Finmart and higher loan-loss expense. Discontinued-operations loss was $100.9m for the nine months.
- Grupo Finmart revenue fell 27% and loan originations fell 56% year over year for the nine months. Its non-performing loans were 47% of the portfolio at June 30, versus 29% at September 30, 2015; bad debt expense was $26.4m for the nine months.
- On July 1, 2016, after quarter-end, EZCORP agreed to sell Grupo Finmart to AlphaCredit for a base price of $50.0m, subject to adjustments. A portion of the price may be deferred if the buyer lacks financing at closing; completion was expected by fiscal year-end, subject to conditions and regulatory approval.
- Cash Converters contributed $5.6m of equity-method income for the nine months, versus $0.3m a year earlier. EZCORP said the decline in its investment’s fair value was not other-than-temporary, but will continue monitoring it.
- Management cited better pawn loan growth, merchandise pricing and aged-inventory levels. Quarterly U.S. same-store pawn loan balances grew 10%; Mexico pawn results were stronger on a constant-currency basis, while reported results were affected by peso depreciation.
- Management expected operating cash and cash on hand to cover obligations and planned needs for the remainder of fiscal 2016. It had obtained a commitment for a $100m secured credit facility and expected the initial $50m to fund around late August 2016. If the Grupo Finmart sale were delayed or did not close, additional financing or other liquidity measures might be needed.
Outlook, risks and controls
- No formal earnings or revenue guidance was provided. EZCORP noted seasonal effects, including historically higher U.S. pawn service charges in the fourth fiscal quarter.
- Grupo Finmart’s collection delays and funding requirements pose liquidity risk. While it remains a subsidiary, a default on more than $25m of borrowings could trigger an event of default under EZCORP’s convertible notes. EZCORP also guaranteed future outflows on Grupo Finmart currency forwards, then totaling $27.2m.
- Management reported disclosure controls were not effective at June 30 because of a material weakness in internal control over financial reporting. Remediation was underway, with completion expected by fiscal year-end, subject to successful testing. The filing also reports a retrospective correction of an overstatement of net tax assets, reducing retained earnings at September 30, 2014 by $14.3m; management said the errors were not material to previously reported periods.
- Legal matters include shareholder derivative and securities litigation and an SEC investigation. The company said it could not predict outcomes and had not recorded liabilities because losses were not considered probable or reasonably estimable. It disclosed payment of $10.5m related to settlement of issues with the CFPB.
- Cash Converters’ strategic review could generate up to $8.5m of pre-tax costs affecting EZCORP; management anticipated most would be recognized in fiscal Q4 but could not quantify timing or ultimate impact.
Key facts for investors to verify
- Whether the Grupo Finmart sale closes on schedule, final proceeds and adjustments, deferred consideration, and the treatment and collection of intercompany notes.
- Grupo Finmart loan collections, non-performing-loan mix, reserve adequacy, and whether further impairments or funding needs arise.
- Funding, terms and availability of the committed secured credit facility, and any effects of subsidiary debt defaults on EZCORP’s convertible notes.
- Progress and testing results for internal-control remediation, and any further accounting revisions or disclosures.
- Fourth-quarter Cash Converters restructuring costs and changes in the fair value of EZCORP’s investment.